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Indeed, the Sharpe ratio utilises the risk-free rate. When you're using another benchmark then the risk-free rate, say the market, the ratio is often referred to as the Information Ratio. In addition, the denominator becomes the standard deviation of the difference between the market return with your portfolio returns instead of standard deviation of the ...


You actually need to consider a 0 return on the periods with no holdings (during that period volatility is 0 and you have a negative return due to the opportunity cost of not holding risk free debt). From that you can compute your daily sharpe ratio and then multiply by $252^{0.5}$ as you mention.


Sharpe ratio = $\frac{r_p - r_f}{\sigma_p}$, where: $r_p$ is the expected portfolio return $\sigma_p$ is the portfolio's standard deviation $r_f$ is the risk free rate. When you leverage '$n$' times: The leveraged portfolio return is $n r_p - (n-1) r_f$ (subtracting the cost of borrowing the money) The standard deviation increases to $n\sigma$ ...

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